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It is important to emphasize that we are concerned
here with a tax on "accumulated taxable income," � 531,
and that the tax attaches only when a corporation has
permitted "earnings and profits to accumulate instead
of being divided or distributed," � 532(a). What is
essential is that there be "income" and "earnings and
profits." This at once eliminates, from the measure of
the tax itself, any unrealized appreciation in the
value of the taxpayer's portfolio securities over cost,
for any such unrealized appreciation does not enter
into the computation of the corporation's "income" and
"earnings and profits."
The corporation's readily marketable portfolio
securities and their unrealized appreciation,
nonetheless, are of profound importance in making the
entirely discrete determination whether the corporation
has permitted, what, concededly, are earnings and
profits to accumulate beyond its reasonable business
needs. If the securities, as here, are readily
available as liquid assets, then the recognized
earnings and profits that have been accumulated may
well have been unnecessarily accumulated, so far as the
reasonable needs of the business are concerned. * * *
Upon this analysis, not only is such accumulation as
has taken place important, but the liquidity otherwise
available to the corporation is highly significant. In
any event--and we repeat--the tax is directed at the
accumulated taxable income and at earnings and profits.
The tax itself is not directed at the unrealized
appreciation of the liquid assets in the securities
portfolio. The latter becomes important only in
measuring reasonableness of accumulation of the
earnings and profits that otherwise independently
exist. What we look at, then, in order to determine
its reasonableness or unreasonableness, in the light of
the needs of the business, is any failure on the part
of the corporation to distribute the earnings and
profits it has.
Ivan Allen Co. v. United States, 422 U.S. at 627-628.
What is required, then, is a comparison of accumulated
earnings and profits with "the reasonable needs of the
business." Business needs are critical. And need,
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